Using Economic Theory and real life examples analyse

factors that are likely to affect a firms total costs (15

marks)
There are 3 types of firms costs. Fixed costs are business costs,
such as rent, that are constant whatever the amount of goods
produced, Variable costs are costs that varies with the level of
output such as raw materials and semi-variable costs are costs
composed of a mixture of fixed and variable components.
As both variable costs and semi-variable costs change with the
output of a firm the most major factor affecting a firms total cost is
output. For instance if a manufacturer sells more of its product, then
more of it is going to be made. Meaning that the firm is going to
need to perchance more Raw materials and there costs are going to
rise; raw materials are an example of a variable cost. Another effect
of increased output is increased labor over a short period of time (on
a 0 hours contract) in order to increase output to meet large orders
and again this will ad to the cost sheet of firms as these new short
term employees need to be paid. Furthermore on the topic of labor
some firms operate using a bonus system in which case there wages
are semi variable and thus the cost of labor in these firms increases
with output/profit.
In the short run, a period of time where at least one factor of
production is fixed, some costs are fixed. Fixed costs also make up a
large amount of total firms costs for instance Rent, Rates and fixed
salaries. So therefore factors such as location affect firms costs
from one place to another as rent may be higher in certain areas or
the cost of living may vary from place to place meaning that the
employees will demand a higher wage. Furthermore factors such as
government legislation and minimum wage therefore have huge
implications on firms costs as wage price will rise.
Another factor that could affect firms costs is the law of diminishing
effect. Diminishing returns refers to production in the short run.In
the short run, the law of diminishing returns states that as we add
more units of a variable input to fixed amounts of land and capital,
the change in total output will at first rise and then fall. Diminishing
returns to labor occurs when marginal product of labor starts to fall.
This means that total output will be increasing at a decreasing rate.
So therefore if for instance a firm over employs it will eventually
lead to decreased output and increased costs. The marginal cost of
supplying an extra unit of output is linked with the marginal
productivity of labour. The law of diminishing returns implies that
marginal cost will rise as output increases. Eventually, rising
marginal cost will lead to a rise in average total cost.
When diminishing returns set in the marginal cost curve starts to
rise. Average total cost continues to fall until the point where the
rise in average variable cost equates with the fall in average fixed
cost. This is known as the output of productive efficiency.

So
costs
result

therefore a firms
can also rise as a
of firms
mismanagement
of factors of production such as too much capital/ labour for a
limited amount of land. This would also lead to direct rises in firms
costs as they would need to employ all the new labour and pay for
the utilities that will also increase (variable cost) with new employed
labour.
In conclusion Firms costs are effected by both variable and none
variable factors and the law of diminishing returns.